Cliff Notes: Caution Appropriate, But a Risk to Growth

Key insights from the week that was.

The January Monthly CPI Indicator showed results in line with expectations, revealing a 0.2% monthly decrease in prices. Year-over-year, this leaves headline inflation at 2.5% as of January, which aligns with the target range. Within the detailed monthly data, there were unexpected variations. For instance, the elimination of Queensland's energy rebates caused electricity prices to rise more than anticipated. Conversely, the rate of dwelling price inflation is easing. The trimmed mean inflation estimate stood at 2.8% annually, just a slight increase from 2.7% in December. However, all core inflation measures remained within the desired range of 2-3%. A single monthly outcome does not substantially alter expectations, especially given that this monthly report offers only a limited snapshot of inflation. The following quarterly update is expected just before the RBA’s meeting in May.

As we approach the Q4 GDP updates due next week, two partial indicators regarding investment were also released.

Construction activity grew by 0.5% in Q4, which is less than anticipated. However, the yearly trend shows significant recovery, moving from an annualized rate of 1.3% in the first half of the year to 5.0% in the second half. Public infrastructure projects have played a vital role in boosting construction, and there are signs of a budding recovery in private sector investments in both infrastructure and residential areas. Notably, price details indicate that capacity constraints might be lessening.

In contrast, private CAPEX (capital expenditure) reported a surprising decline of 0.2% in Q4, bringing its annual growth down to 0.6%. There was evident weakness across various sectors, especially in mining, which saw a drop of 0.6% compared to a minor 0.1% decline in non-mining sectors. The CAPEX intentions for 2025-26 suggest that companies are cautious and scaling back their investment plans due to uncertainties in both local and global economies.

Nevertheless, it's crucial to acknowledge the fluctuations often present in preliminary estimates of CAPEX expectations for a financial year. Emerging positive trends for businesses are elaborated on in Westpac’s recent Quarterly Business Snapshot.

Later today, a preview for Q4 GDP will be published.

Internationally, it was a relatively quiet week concerning data. The most noteworthy was US consumer confidence data, which indicated worries among households regarding potential economic impacts from tariffs and immigration policies, particularly regarding inflation. Additionally, core durable goods orders suggested that businesses are hesitant to fully commit to new capital expenditure until they observe how the economy progresses. Home sales data also reflected the effects of rising mortgage rates on affordability, with both new and pending home sales declining by 10.5% and 4.6% respectively in January.

Regarding tariffs, President Trump announced the implementation of a 25% tariff on all imports from Mexico and Canada, excluding energy products, starting March 4th. An additional 10% tax will be added for imports from China at the same time. Moreover, European imports will also face a 25% tariff, with reciprocal and product-specific tariffs anticipated to follow in April. In response, Canadian Prime Minister Trudeau expressed strong opposition, which could provoke further actions from the US. It is not surprising that FOMC (Federal Open Market Committee) members noted inflation uncertainties and emphasized a cautious approach to policy.

In Asia, the Bank of Korea decided to cut its base rate by 25 basis points to 2.75%, marking the third reduction since October 2024. This change came with a downgrade of growth forecasts for 2025 from 1.9% to 1.5%, primarily due to tariff impacts and decreasing domestic demand. Additionally, tariffs are now expected to be imposed in Q1 2025, sooner and potentially larger than earlier estimates suggested. As a result, core inflation forecasts for 2025 have been lowered to 1.8% from the previous estimate of 1.9%. The Bank of Thailand also surprised the market by cutting rates by 25 basis points to 2.0%, in response to structural issues in the manufacturing sector that threaten growth. Tariffs and trade tensions in the region could further intensify these challenges.

In contrast to the inflation concerns faced by the US, emerging market economies in Asia have the capacity to proactively address the growth risks arising from geopolitical tensions and tariffs.

CPI, Inflation, Tariffs